How Apple can Grow in India

India has gone from never being mentioned on Apple earnings calls to being a frequent topic of discussion both in Tim Cook’s prepared remarks and in the analyst Q&A that follows — there were ten or more mentions of India in each of the last two earnings calls. Tim Cook recently visited India and announced two major investments there in developing content for the Apple ecosystem. Cook has been talking up India as if it would be Apple’s next big market, yet it likely accounted for around 1% of iPhone sales in 2015 and Apple’s market share there isn’t much higher. How can Apple grow to a meaningful size in India and is it prepared to do what it will take?

India isn’t China

One of the things Tim Cook said about India on one of the recent earnings calls is India is in some ways like China seven to ten years ago. It’s impossible to know precisely what he means by this but the reality is India and China today are very different countries and even turning back the clock a few years wouldn’t close the gap all that significantly. Despite very similar sized populations (just under 1.3 billion versus 1.37 billion), the economies of the two countries are still far apart. According to Credit Suisse, GDP per adult in India last year was a little under $3,000, while in China it was close to $10,000; over 95% of the Indian population has under $10,000 in wealth or assets, while in China that figure is 62%. Disposable incomes are much lower on average in India, and that has a dramatic impact on the prospects for a company like Apple.

Turning to the smartphone market specifically, there are more big differences and some unique characteristics. Depending on who you believe, 70-75% of smartphones sold in India are at the sub-$150 level, while just 7% are in the “high-end” bracket of $300 and up. Samsung leads the overall market, while Chinese and Indian vendors dominate the rest of the top 10 lists, selling almost exclusively into the low-end bracket. Around 100 million smartphones were sold in India last year, compared to over 450 million in China. And 4G LTE networks are just beginning to roll out in India, while they’ve been available for some time in China. The reality is, both economically and in terms of the smartphone market, India represents a very different opportunity for Apple than China.

Apple in India today

Apple’s position in India today, as in many markets around the world, is largely about the iPhone. That’s where this analysis will focus. Yes, it also sells Macs and iPads there, but the iPhone has to be the core of its strategy in India. Having said that, Apple doesn’t sell many iPhones there – only around two million of last year’s 221 million global iPhone sales were in India. Apple only plays in that 7% high end segment and really only in the upper echelons of that segment, giving it a very small addressable market.

Keys to faster growth

I’m not based in India, but I’ve spent the last few weeks soliciting insight from as many people with experience of the Indian market as possible in order to form a view of Apple’s perceived shortcomings there and what it can do to improve its position in the Indian market. That research has surfaced four key themes around what Apple needs to do differently:

Reducing prices

Achieving services parity

Better localization

Distribution

Let’s look at each of these in turn.

Reducing prices

The first thing almost everyone mentions when I talk to them about the iPhone in India is price. There are two components to this: first, global iPhone prices relative to Indian disposable incomes and second, prices for iPhones in India are higher than in many other countries. The solution, many people say, is Apple needs to bring its prices way down in India. Given the small size of the addressable market and current pricing, the only way for Apple to significantly expand is to reduce prices and extend its products into other pricing brackets.

There are essentially three ways Apple could do this:

Charge less and take lower margins on existing products

Create new products at lower cost for the Indian market

Sell pre-owned devices

Unfortunately, the first two both seem unlikely – Apple already makes considerably less margin on iPhone sales in India because it has to offset at least some of the tax and duty applied to imported phones, so it’s unlikely to charge dramatically less. Secondly, Apple doesn’t create country-specific versions of its phones and creating a phone at substantially lower cost would also mean stripping out functionality and performance, something Apple is also unlikely to do. Even if it were to do either of these first two things, it’s unlikely Apple would be able to get iPhone prices well below $450, which is still within the upper ranges of the high end of the market.

The only thing Apple can really do to reach much lower prices is selling pre-owned devices. That’s a strategy it’s employed elsewhere and which it has increasing ability to do because of all the devices it will receive back through the iPhone Upgrade Program later this year and beyond. However, the Indian government has shut down this avenue, citing spurious environmental concerns, leaving Apple unable to pursue the only viable strategy for bringing prices down significantly in India. That means Apple has to largely grow share rather than increasing its addressable market, which brings us to the other three themes.

Achieving services parity

The second major theme is Apple’s services – such an important plank of its global strategy in light of slowing hardware sales – are sub-par in India. Among the examples are:

Basic maps are available, but transit, traffic, business reviews, directions and navigation are not

Siri is limited in the functions it can provide

iTunes doesn’t include TV shows (which are only available in a handful of countries worldwide)

Apple News is unavailable

Apple Pay is unavailable

The iBooks catalog is limited to free titles

All of this makes iPhones less attractive than elsewhere in the world, where the content and other services are an important part of the package. There are also fewer local apps in stores than in other markets. If Apple wants to create a compelling value proposition in India, it needs to fix that and achieve parity wherever possible. That’s obviously harder with something like Apple Pay than in some of the other categories but it’s critical to make meaningful progress here. It’s clear Apple understands this, hence its investments in an accelerator and a Maps center in India, both announced during Tim Cook’s recent visit.

Better localization

One of the most challenging aspects of the Indian market is linguistic fragmentation. According to census figures, over 1300 languages are spoken in India and a dozen or so are spoken by 10 million or more people. Hindi is the official language and English is the lingua franca among certain populations, but these two languages alone can’t address the general population. Meanwhile, Apple only offers Siri in English, it offers a “Hinglish” keyboard in iOS which allows users to type on a keyboard with English characters but see results in Hindi text and also offers a handful of other local-language-only keyboards. But half a dozen or so major languages are still missing. I’ve already mentioned maps content, but it also needs better localization. Apple Music is missing much of the Indian music that’s important to locals and competitor Saavn apparently has a much better catalog here. The examples go on, but the key point is Apple has to make a bigger commitment to local language support and improving local content in Maps, Music, iTunes, and elsewhere to be relevant to more of the Indian population.

Distribution

In other markets to which Apple has made a big commitment, having a direct retail presence has been important. Apple now has stores in 18 countries around the world, but India isn’t one of them. This is primarily because India only allows direct distribution by companies who make 30% of their products in India. Since Apple doesn’t manufacture iPhones there, it hasn’t been able to open stores, but the Indian government seems likely to relax this restriction at least temporarily and allow Apple to begin opening retail stores in India. I would guess this decision will be revisited over the next couple of years and it may be that Apple needs to start working with Foxconn to put factories in India to meet the requirements over the next few years in order to maintain that retail presence, but it’s a start. Direct distribution won’t fix all of Apple’s challenges in India but it will help it better showcase its products in the way it does in other major countries, and demonstrate its commitment to the market, both of which should help.

Realism is required

Even if Apple puts significant effort into all these areas and makes meaningful progress over the next few months and years, the inherent characteristics of the Indian market will cap its growth there. Disposable incomes, competition from local and Chinese competitors, high barriers to entry for imported phones, and more will continue to limit Apple’s addressable market to a small minority of the total smartphone opportunity in India. It’s unlikely it will ever approach anything close to the opportunity Apple currently enjoys in China and Apple needs to be careful not to overplay its hand here. It also raises the question of whether all the investment Apple is making in India today will pay off – certainly it’s a very long-term investment and that’s reflected in Tim Cook’s recent remark “we’re here for a thousand years”. It certainly won’t take that long for the investment to pay off but we’re certainly talking years and not months.

Thanks

I want to briefly thank all those who helped me in my research for this post and an episode of the Beyond Devices Podcast that also went up today on the same topic, including Shibesh, Harshil Shah, Sudeep Mishra, Sascha Pallenberg, Viranch Damani, Varun Krishnan, Nitin Alabur, and others. Your help and insight is much appreciated.

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.